Category Archives: Licensing

A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?

 

 

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Standard international software licences: a pipe-dream?

opiumMany years ago, when IP Draughts was a junior associate, one of his regular clients was a software standards organisation whose members included most of the world’s largest computer companies. Although the organisation was UK-based, many of its members were US corporations.  On more than one occasion, IP Draughts heard members encouraging the organisation’s UK staff to be more international in their outlook, which in practice seemed to mean being more American.

On a similar note, IP Draughts vividly recalls the person who gave him instructions on behalf of this organisation, a lady with the title Head of Legal and Commercial, or similar, making adverse comments about an English court judgment that came out at the time. The judgment concerned the interpretation of a software licence, and IP recalls that it took a different line to a US judgment on a similar subject. The client seemed to be offended that an English court took this decision, and she was of the opinion that it was not in the UK’s interests to have laws that differed from those of the US in the area of software transactions. It should be pointed out that this client was English, but her working experience was in a US commercial environment. IP Draughts suspects that if she had been a US national she would have been more diplomatic in her comments, if she had chosen to make any comment on such a subject to a snotty-nosed English lawyer in his twenties.

These memories are prompted by two recent events.  The first is the striking observation by Larry Page, the head of Google, in light of the recent European case on the “right to be forgotten”. He is reported as saying that he regretted not being “more involved in a real debate” about privacy in Europe, and that:

We’re trying now to be more European and think about it maybe more from a European context… A very significant amount of time is going to be spent in Europe talking.

leido bookSome of the commentary on this subject has suggested that, for a US organisation, freedom of speech is a constitutional right which trumps other considerations; by contrast, European laws and attitudes, while they value freedom of speech, don’t give it this kind of overriding status.

The second event that prompts this memory is the publication of a new book, Realising the Single Software Market: Cross-Market Validity of Software License Agreements, by Jan Leido. This 627-page book is the PhD thesis of Mr Leido, a research student at Umea University in Sweden, and according to his website biography he is due to defend his thesis orally next week.

The book compares US and German laws in relation to software licensing, and as the abstract explains:

…cross-national validity of certain standard software license agreements is examined as a solution to overcome national differences and improve the emerging single software market. Cross-national validity is mapped, explained and improved under American and German law.

This book is an impressive mixture of academic and commercial discussion of the many factors that affect international software licenses and their validity, and deserves a wide audience. If IP Draughts had read it 25 years ago, he would have been armed with much better answers to the peevish complaint of his former client. More seriously, the book should be part of the prior reading for anyone involved in advising major consumer software providers on their international licensing terms.

IP Draughts wishes Mr (and surely soon to be Dr) Leido the best of luck with his viva voce.

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Two shades of grey: final version of EU TTBER is published

mailShortly before 5 pm yesterday, as IP Draughts was dreaming of the weekend ahead, an email popped into his inbox from the Law Society’s ever-helpful European Office. It alerted him to the publication of the final version of the EU Technology Transfer Block Exemption Regulation (TTBER), which will come into force on 1 May 2014. The final, substantive text, together with an updated version of the European Commission’s (EC’s) Guidelines on Technology Transfer Agreements, can be found here, though it seems they have not yet been published in the Official Journal.

See also the EC’s press release, and their Memo (also described as FAQs) document; the latter provides a slightly more detailed summary of the changes.

In essence, the documents are changed very little from the drafts that the EC circulated over a year ago.  The EC apparently received 56 responses to their consultation on the first drafts, a majority of which seemed to dislike the EC’s proposed changes to the 2004 TTBER. IP Draughts led the team that commented on the earlier drafts on behalf of both the Law Society of England and Wales and the Intellectual Property Lawyers Association. We certainly disliked the changes, and argued for a more liberal regime generally. A copy of that submission appears on the EC’s website here. This blog has discussed the drafts in brief, eg here.

For practical purposes, the main changes to the TTBER, in both the first and final drafts, are in Article 5, headed “excluded restrictions”, but which IP Draughts prefers to call the “grey list”.

Emeritus Professor Valentine Korah of UCL Faculty of Laws

Emeritus Professor Val Korah of UCL Faculty of Laws

First, some background. In previous TTBERs, the “hardcore restrictions” in Article 4 were known as “black-listed clauses”, and following this colour theme, Article 5 restrictions were known as the “grey-listed clauses”. Certainly, (now Emeritus) Professor Val Korah referred to them by this name when she taught competition law to IP Draughts in the 1980s. Including a hardcore/black-listed clause in your agreement brings the entire agreement outside the safe harbour of the TTBER and is very likely to result in a breach of Article 101 of the TFEU.

By contrast, including an excluded/grey-listed clause merely means that you have a clause that is not within the safe harbour, but the rest of the agreement may be within the safe harbour. The EC is suspicious of grey-listed clauses, but not to such a great extent as in the case of black-listed clauses. It is up to you to justify the inclusion of the grey-listed clause to the court, if this issue arises in litigation. In summary, it is a very high risk strategy to include a black-listed clause, and a lower risk strategy (but still risky) to include a grey-listed clause.

Two changes have been made to the grey list in the 2014 TTBER:

  1. Licensee improvements. Article 5 grey-lists an obligation on the licensee to assign or exclusively license back to the licensor any improvements made by the licensee to the licensed technology. Under the 2004 TTBER and its predecessors, this applied only to “severable” improvements, ie those which could be used without infringing the original, licensed technology. The EC has now abandoned the distinction between severable and non-severable improvements, and grey-lists  assignments and exclusive licences of all licensee improvements.
  2. No-challenge clauses. Article 5 also grey-lists an obligation on the licensee not to challenge the validity of the licensed IP. Under the 2004 TTBER and all its predecessors, Article 5 went on to explain that a clause allowing the licensor to terminate the licence agreement if the licensee did  mount such a challenge was not grey-listed. By implication, therefore, a clause allowing termination was within the TTBER, and in practice many, or most, licence agreements that IP Draughts has seen include such a right of termination. However, under the 2014 TTBER this “right” to terminate is limited to exclusive licence agreements.

glass half fullThe first draft of the 2014 TTBER would have deleted all reference to a right of termination but in the final text the EC has reinstated the right for exclusive licences only. So (if taking a “glass half full” approach) one could say that progress has been made during the consultation process. As the EC has noted in its summary of responses, some commenters (including the Law Society) objected strongly to the notion that a licensor could be prevented from terminating the licence of a party that was challenging the licensed IP.  This would lock a licensor into an agreement with its enemy in litigation, and would be a disincentive to licensing. During the consultation process, IP Draughts made comments to this effect in a public meeting at which EC representatives were present, but he felt those representatives were unsympathetic in their response.

The EC has explained its change of heart in the following terms:

In light of the second consultation, the TTBER will continue to cover termination clauses in exclusive agreements when the relevant market share thresholds are not exceeded. In case of exclusive licensing the licensee generally has no incentive to have the IPR declared invalid, but may in particular use the threat of a challenge to put pressure on a smaller innovating licensor. Automatically exempting termination clauses only in cases of exclusive licensing will lead to a proper balance between, on the one hand preserving incentives to innovate and license out, and on the other ensuring that invalid IPR are removed as a barrier to innovation and economic activity. This will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees.

These comments seem to echo some points that were made in the Law Society’s comments on this issue, including:

The change would particularly prejudice SMEs who are licensors, as they are least able to defend an attack on their patent portfolio by a large licensee.

There are a few other changes in the 2014 TTBER over the 2004 TTBER, including:

  • passive sales: the list of hardcore clauses previously made an exception (ie allowed) for certain restrictions on passive sales into another licensee’s [EU] territory for a limited, 2-year period. This exception has now been removed. In IP Draughts’ experience, this was rarely an issue in negotiations, so the effect of this change is probably minimal.
  • software licensing: Recital (7) states that the TTBER does not apply to agreements for the “mere reproduction and distribution of software copyright protected products as such agreements …are more akin to distribution agreements”. In other words, these agreements should be considered under the block exemption regulation for vertical agreements. In IP Draughts’ view, the EC is having second thoughts about the inclusion of software licensing within the 2004 TTBER.  Actually, IP Draughts has come to a similar conclusion in recent years, ie that much software supply is closer in concept to a supply of goods than it is to a licensing of technology.

The exclusion of certain software licences is further explained in the new Guidelines for Technology Transfer Agreements:

(62) The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be “production” within the meaning of the TTBER and thus is
not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by Commission Regulation (EU) No 330/201042 and the Guidelines on Vertical Restraints. Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end users. Nor do they cover the licensing of software copyright and distribution of software by means of “shrink wrap” licences, that is, a set of conditions included in the package of the hard copy which the end user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.
(63) However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.

IP Draughts is also pleased to see some improvements in the drafting of the final 2014 TTBER, compared with the first draft, including some which address points that the Law Society made on the definitions of what are now “technology rights” and “technology transfer agreement”.

norrisOverall, IP Draughts has the sense that the EC’s Competition Directorate continues to have a deep distrust of IP rights, and of commercial parties and their lawyers who argue for a more liberal competition law regime for IP licensing. However, at the margins, and in relation to drafting issues, he feels the EC has listened to the comments of the Law Society and others, and has made intelligent revisions to the text of the TTBER (which was not always the case when previous TTBERs were drafted).

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How do you solve a problem like… taxation of IP?

Oh dear, I've forgotten what the Austria:UK double taxation treaty says!

Oh dear, I’ve forgotten what the Austria:UK double taxation treaty says!

IP transactions can raise complex tax issues on which specialist advice should be sought.  But the transactional IP lawyer needs to have at least a basic understanding of tax issues, so that he or she can recognise tax issues, instruct specialists where necessary, and (particularly where the transaction does not justify the close involvement of a tax specialist in negotiations) draft and negotiate wording to deal with tax issues in IP agreements.

IP Draughts was recently involved in seeking tax advice in relation to the structuring of agreements with a Gibraltar company.  The client, a privately-owned technology company, was being prudent to ensure that no significant tax risks or tax-saving opportunities arose from the transaction.  The clients and IP Draughts were pleasantly surprised at how down-to-earth and user-friendly tax counsel was.  The advice given was practical and authoritative.  Behind the scenes, IP Draughts and his colleagues had worked hard to find the right tax barrister who was sufficiently experienced, understood both UK and Gibraltar tax, was used to helping individuals and SMEs, did not cost a fortune, and had time available to help us.  It came down to two or three names at the London Bar.

The main tax issues that usually arise in IP licence agreements are the following:

  1. Withholding tax. Must the licensee deduct income/corporation tax from the amount of payments due under the agreement, and pay only the net amount to the licensor, paying the remainder to the tax authorities in the licensee’s jurisdiction?  Most countries have rules on the withholding of tax at source on royalties and other IP payments.  This tax is commonly known as withholding tax.  The tax is being levied on the licensor, and the licensee is acting as a tax collection agent.   It may be possible to get permission from the tax authority to pay the royalties without deduction of tax, if a double-taxation treaty is in existence between the country of the licensee and the country of the licensor.  Typically, the licensor produces evidence from its tax authority that it is a tax payer in the licensor’s country, and this evidence is provided by the licensee to the tax authority in its country.
  2. Drafting for withholding tax. Licence agreements typically say one of two things: (a) the licensee can deduct withholding tax but must cooperate with the licensor to seek an exemption from the licensee’s tax authority, or (b) the licensee must “gross up” the royalty payment so that the amount is as stated in the agreement.  In the latter case, the licensee may also have to make a withholding tax payment, so the licensee is taking the risk of tax being levied on the licensor.
  3. Once we get into Switzerland, we will be free from the VAT regime

    Once we get into Switzerland, we will be free from the VAT regime!

    Value Added Tax. In principle, payments under IP licence agreements are subject to VAT, as payments for “intellectual services”.  The VAT regime applies across the EU.  VAT law is complex, but in summary: (a) invoices from a UK licensor to a UK licensee are likely to include a demand for VAT on the payment, (b) invoices from a UK licensor to a licensee in another EU country are likely not to include VAT – VAT is accounted for by the licensee to its local VAT authority under a complex “reverse charge” procedure but VAT is not paid to the licensor, and (c) invoices from a UK licensor to a non-EU licensee are likely not to be subject to VAT at all, as they are outside the scope of VAT.  However, special rules may apply, eg payments arising from litigation may be treated differently.

  4. Drafting for VAT. Unless otherwise stated in the agreement, any payments stated in the agreement are exclusive of VAT.  If the licensee is obliged to pay VAT to the licensor, it will do so by paying an additional amount, on top of the stated amount, if presented with a valid VAT invoice.  Typically business-to-business agreements within the EU state that payments are exclusive of VAT.  Typically, neither party ends up with a VAT liability as at the end of each VAT accounting period it will simply subtract the VAT paid to suppliers from the VAT charged to customers and pay the net amount to the VAT authorities.  Usually, it is only the end consumer who pays VAT but cannot recover it in his tax accounts.  US parties to licensing transactions sometimes object to clauses that state that payments are exclusive of VAT, as they equate VAT with sales tax.  In fact the regimes are very different.
Patent Box?

Patent Box?

These are not the only tax issues that can arise, but they are the most common.  In some countries, stamp duty may need to be considered.  The UK abolished stamp duty on future transactions over a decade ago.  In some cases, other taxes may need to be addressed in contracts, eg whether a party has sufficient rights to qualify for the “patent box” or for R&D tax credits.  However, these are specialist areas and have not yet generated any standard contract clauses – unless you know differently?

IP Draughts invites readers to share any standard tax-related wording that they have seen or used in IP agreements.

 

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